Organizing to Adapt and Compete,
American Economic Journal: Microeconomics

Abstract

We examine the relationship between the organization of a multi-divisional Örm and
its ability to adapt production decisions to changes in the environment. We show
that even if lower-level managers have superior information about local conditions, and
incentive conáicts are negligible, a centralized organization can be better at adapting
to local information than a decentralized one. As a result, and in contrast to what is
commonly argued, an increase in product market competition that makes adaptation
more important can favor centralization rather than decentralization.